Group assignment 604

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Table of Contents
Introduction................................................................................................................................3
Management accounting concepts.............................................................................................4
Part 1.1: Underpinning Concepts...........................................................................................4
Part 1.2: Application...............................................................................................................7
Conclusion................................................................................................................................13
References................................................................................................................................14

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Introduction

Report states accounting concepts or frameworks involving bookkeeping, costing and pricing,
planning and budgeting, investment appraisal and ratio analysis. Also above mentioned
concepts are applied to hotel with fifty guest rooms. Each concept is applied in a hypothetical
manner to hotel context and shows applicability in management accounting reference.
Analysis is made so as to understand framework of management accounting inclusive of
estimation and tracking costs. It involves analysing costs, cost behaviour and cost variances.
Acknowledgement of appropriate and related accounts is essential for making effective
decisions within hotel framework.

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Management accounting concepts

Part 1.1: Underpinning Concepts

Bookkeeping: Hotel bookkeeping rotates around recording daily sales, organisation of

financial transactions or operations, cleaning books, preparation of night audit, monitoring
financial health and configuration of income sheets. Bookkeeping is done so that records can
be conserved to depict financial position of each and every head of income and expenditures
(Novianty, 2015). It consists of recording all financial transactions, posting debit and credits
in specified ledgers, production and organisation of all source documents involving invoices.

Method of bookkeeping: It involves:

Double entry bookkeeping: It is very strong method. It uses principle that each transaction
impacts at least two accounts, and they are recorded as debits and credits. Usage of double
entry for bookkeeping is useful when business is giant, public, or purchases and sells on
credit. Choosing this method prevents error in recording of transactions. For an illustration if
sale is made of $10, then cash account shall get debited for $10 and sales account shall get
credited by similar amount.

Cash based or accrual based: Selection between cash based or accrual based bookkeeping
method is to be made. This decision depends on when a business intends to recognise its
revenue and expenditures. In cash based method revenue is recognised when cash is received
in business (Kihn & Ihantola, 2015). Expenses are considered when their payment is made. In
accrual method revenue is considered when it is gained.

Costing: Costing is a type of managerial accounting that capture total cost of manufacturing
of company by evaluating variable costs of each phase of manufacturing or fixed costs such
as lease expense. It is used on internal basis by management so as to make wholly informed
business decisions.

Pricing: Costing is known to be mechanism of charging expenses for manufacturing goods

or services which is sold by company. Price is known to be amount which is to be paid for a
product or service. For those functioning in hotel industry, maximisation of revenue is a top
most preference and achievement of this goal needs an accurate pricing strategy at
appropriate time.

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Pricing strategy oriented on forecasting: Single most significant pricing strategy for hotels is
utilisation of forecasting to set their prices oriented on probable demand. Basically, this
would imply that hotel room is to be charged shall depend on how incremented the demand
is. For an example, times of bulk demand may result in higher rates of room, so as to enlarge
revenues (Goh & Scerri, 2016). A strong forecasting mechanism depends on appropriate
records being kept with past data such as possession, revenue, rates of room, average
spending per room.

Rate parity mechanism: It includes maintaining consistent rates for similar product among
all online distribution mediums. The prime advantage of this is that it facilitates transparency
for customers while it is perhaps a precondition of advertising rooms through online travel
agents.

Planning and budgeting: It is known to be first step of any business where finances of
company are planned in short duration as well as in long duration. It further involves:

Assessment of business environment

Approval of vision and objectives of business

Identification and quantification of kinds of resources required

Labour

Equipment

Materials

Calculating of an overall costs

Summarisation of costs to design a budget

XERO: It is significant accounting and payroll software used in small business. Cash-flow
can be seen in real time with online accounting, invoicing, billing and banking. All of its
plans involve each of features provided such as estimates, accounts payable and inventory
management tools. There are three features which are available in top tier involving
expenses, multicurrency assistance and project monitoring. Xero save time by categorising
procedures and providing tools to attain financial tasks in fast manner (Novianty, 2015).

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Email of online invoices can be made directly from software and it can integrate well with
PayPal, stripe, Square and other payment processors.

Investment appraisal: It is an analysis undertaken to recognise profitability of an investment

over asset life along with recognitions of affordability and strategic fit. For many of hotel
groups primary financial goals for hotel management is to enlarge possession with revenues,
to keep costs under control and to ensure that their business continues to captivate consumers.
There are many methods of calculation of market value of hospitality entity depending
whether an entity is owned privately or publicly.

With use of stock market: Each day from 9:30 am to 4 pm, each hour and each minute the
entities which are listed on stock market are trading at their market value of equity. Price per
share depicts market value of equity of company. If stock price is taken by a trader of
publicly traded entity and is multiplied by shares outstanding, outcome is the equity value.

Discounted cash flow method (DCF): It is utilised for measuring company value relied on
futuristic cash flows of company. Predictions to compute DCF are often developed from top
to down with use of several assumptions (Kihn & Ihantola, 2015). For computing DCF four
attributes are considered:

Stream of futuristic cash flows

Exit year mainly five to seven years

Terminal value

Discount rate

Ratio analysis: Ratio analysis is numerical method of earning insight in liquidity of

company, functional efficiency, and profitability by assessing its financial statements such as
balance sheet and income statement. Ratios are comparison elements for entities and they
tend to assess stocks within an industry. Similarly they assess a company against its historical
numbers.

Liquidity ratios: It facilitates stakeholders with informational details about ability of

company to fulfil its short durational financial liabilities. Hospitality industry needs a vast

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amount of working capital and consist of vast short term financial liabilities to cover, making
liquidity ratios a significant portion of analysis of industry.

Current ratio: It is a liquidity measure which depicts how a company has ability to fulfil
short durational obligations with short durational assets in hand. Assets recognised as short
term are anything such as inventory and do not consist of property, plant and equipment. For
hospitality industry companies have huge current liabilities in form of salaries, wages and
short- term obligations (Goh & Scerri, 2016).

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Part 1.2: Application

Bookkeeping: Method of bookkeeping involves:

Double entry bookkeeping: It is very strong method. It uses principle that each transaction
impacts at least two accounts, and they are recorded as debits and credits. Usage of double
entry for bookkeeping is useful when business is giant, public, or purchases and sells on
credit.

Choosing this method prevents error in recording of transactions. For an illustration if sale is
made of $10, then cash account shall get debited for $10 and sales account shall get credited
by similar amount (Shkurkin, et. al., 2016).

Following books are maintained by entity in tabular manner:

Cash book: It is framed for recording of cash transactions which is for recording
disbursements made for visitors. Receipt side of cash book must consist of several columns
for breakfast, lunches and dinner, bar, cigarettes and cigars, carriage if any.

In same manner payment side of cash book consist of wines and minerals, groceries and
provisions, cutlery, glass, plate, beddings and linens, establishment, furniture and fixture etc.
Apart from it cash book shall consist of two other ledgers, visitor’s ledger and personnel
ledger.

Sales day book: It must be maintained for credit sales associated with food, beverages and
room charges (Panday & Chowdhury, 2020).

Purchase day book: In similar manner to sales day book, columnar purchase day book is
maintained for mentioning credit purchases.

For an illustration ABC hotel started business and on 30 June, only balances in ABC hotel
Ltd accounting system were:

Cash $4000

Revenue $300

Equity of proprietor $7700

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On 1 July, from 4000 of balance of cash account stock of beverage of was acquired for $200
cash.

Cash

8000

200

Inventory

200

Hence from above depiction it can be said that reduction in cash essentials a credit to cash
account, increase to stock essentials a debit to inventory account.

On 5 July, ABC Hotel procured inventory stock on credit from XYZ Ltd for $1000.

Inventory

200

200

1000

Accounts payable

1000

Above workings depict increment in credit balance in liability account.

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Costing: Two methods consist of:

Activity based costing: It is known to be method of assignment of overhead and indirect

costs to relevant products and services. This mechanism considers association between costs,
activities of overhead, produced products assignment of indirect costs to goods less arbitrarily
as compared to traditional costing methods. For an example there are five main cost centres
in XYZ hotel such as housekeeping, restaurant, administrative and accounting, technical and
engineering as well as marketing (Mashayekhi & Ara, 2017). Among such cost centres
housekeeping and restaurant are functional. Administrative and accounting, technical as well
as engineering and marketing are non- functional costs. Functional costs are associated to
service facilitated to guests and non- functional costs cannot be directly traced to those
services.

(Source: MyABCM, 2020)

There are five distinct kinds of costs which incur associated with all operations:

Payroll costs

Raw material costs

Employee advantage costs

Utility costs

Repair and maintenance costs

Other significant costs

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Hence in provided case ABC depicts housekeeping activity being more cost consuming as
compared to restaurant. Hence if prices are recognised oriented on actual costs, prices for
restaurant are unfair and restaurant can lose consumers to possibly less expensive rivals. On
the other aspect, cost plus prices in such situation for rooms is not huge enough to consist of
all relevant costs (Mashayekhi & Ara, 2017). Hence ABC can facilitate information regarding
customer profitability analysis, pricing and budgeting as well as strategic investment
decisions.

First –in first-out method: Restaurant with implementing this method makes assumption
that good procured first are goods to be used first. At the end, remaining stock comprises of
most recent acquisitions and is reported for current cost of goods. It is best method as chefs
and back- of- house staff shall utilise ingredients procured earliest with nearby expiration
date so as to ignore spoiling or wasting inventory. It is most reliable indicator of valuing
inventory for restaurants. As this mechanism responds inventory with its real cost, computed
value of remaining products is most appropriate. Managers can have reach to real – time
depletion and inventory counts quickly through modern inventory management software.

Pricing: Competitor oriented hotel room pricing strategy consists of considering rates at
which competitors are selling rooms, consideration is paid to hotels which belong to same
category and same segment. Their rates of each room category are seen and recognition is
made as how travellers react to same. Identification is made if they are capable in attracting
guests with enhanced pricing and offers (Adhikari, 2016). Their hotel pricing mechanism is
studied approximately to identify when they are enlarging and contracting room rates and
how frequently they rollout offer/discounts.

Dynamic pricing system: This is time based pricing mechanism which depicts and provides
best available rates at accurate time for appropriate season as well as for appropriate guest.
Hotelogix cloud oriented property management system assists with applying appropriate
pricing mechanisms in hotel industry. Through it hotels can eliminate struggle to ascertain
rates relied on assumptions. Following elements must be taken care of while applying it:

This is time oriented pricing and rooms must be priced as per time.

Room rates must be incremented and decremented according to demand or lack of it.

An effective pricing mechanism must be identified which functions best for property of hotel

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Automated systems must be used to collate appropriate data to make forecast appropriately,
increment RevPAR.

Dynamic pricing mechanisms must be used appropriately to function around room rates by
viewing rival pricing using technology (Adhikari, 2016).

Planning and budgeting: Two tools consist of:

Prophix: It is a kind of software solution for corporate performance management which

implies that it involves many smaller tools for management of company’s resources and
planning its budgets. Its top feature consists of budgeting, planning and forecasting, financial,
statutory and management reporting, planning of cash flow, profitability modelling and
optimisation as well as personnel planning. With using Prophix one can design detailed
expenditure budget, manage and assimilate personnel plans, conveniently function ad hoc
analysis, run functioning reports and leverage self- serve communicative boards. It
transforms manner in which one works through detecting and surfacing abnormal
transactions through text or voice. It allows companies to design dashboards which facilitate,
exclusive easy to acknowledge views of performance of company with just few clicks.

XERO: It is significant accounting and payroll software used in small business. Cash-flow
can be seen in real time with online accounting, invoicing, billing and banking. All of its
plans involve each of features provided such as estimates, accounts payable and inventory
management tools. There are three features which are available in top tier involving
expenses, multicurrency assistance and project monitoring.

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(Source: TAT Accounting, 2020)

Xero save time by categorising procedures and providing tools to attain financial tasks in fast
manner (Arif, et. al., 2016). Email of online invoices can be made directly from software and
it can integrate well with PayPal, stripe, Square and other payment processors. Xero’s
accounting dashboard depicts snapshot of business such as bank balances, reconciling
elements, outstanding invoices, bills and accounts on watch-list. Its plan is very affordable
and company has an option to increment some characteristics depending on requirements.

Investment appraisal: Two methods consist of:

With use of stock market: Each day from 9:30 am to 4 pm, each hour and each minute the
entities which are listed on stock market are trading at their market value of equity. Price per
share depicts market value of equity of company (Storey, 2018). If stock price is taken by a
trader of publicly traded entity and is multiplied by shares outstanding, outcome is the equity
value. If equity value is added and debt from balance sheet this provides enterprise value.
Enterprise value states what would, someone shall pay to purchase the company.

EV = MV of equity + Debt – Cash

Discounted cash flow method (DCF): It is utilised for measuring company value relied on
futuristic cash flows of company. Predictions to compute DCF are often developed from top
to down with use of several assumptions. For computing DCF four attributes are considered:

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Stream of futuristic cash flows

Exit year mainly five to seven years

Terminal value

Discount rate

Stream of future cash flows: Calculation of bottom line stream of futuristic cash flows must
be made. Outcomes are relied on assumptions of revenue and expenses.

Exit year: Each investor selects an exit year or end of his/her investment. DCF framework
requires this detail so as to compute enterprise’s present value and to compute realised return
on initial capital of investor for private entity (Storey, 2018). Many traders utilise 5-7 as exit
years.

Terminal value: At exit year, trader assumes a value that the company shall be sold at that
date in the future oriented various methods same to method stated above. This value is known
as terminal value. Two most renowned are:

EBITDA Multiple: With use of EBITDA (Exit year) and multiply by existing industry
average to compute enterprise value.

Perpetuity method: Exit year cash flow divided by discount rate.

Discount rate: Most frequently discount rate is used for basically private entities is Weighted
average cost of capital (WACC). Cost of capital of company is collaborated cost of equity
and debt, which is a significant element as it is a rate, which assists management in deciding
whether or not to invest in either of project, equipment portion, or procurement. If such a
project, equipment portion, or procurement can produce cash flows resulting in returns which
is more than firm’s cost of capital then investment is worthy.

Ratio analysis: Ratio analysis is numerical method of earning insight in liquidity of

company, functional efficiency, and profitability by assessing its financial statements such as
balance sheet and income statement.

Liquidity ratios: It facilitates stakeholders with informational details about ability of

company to fulfil its short durational financial liabilities. Hospitality industry needs a vast

14
amount of working capital and consist of vast short term financial liabilities to cover, making
liquidity ratios a significant portion of analysis of industry (Arif, et. al., 2016).

Current ratio: It is a liquidity measure which depicts how a company has ability to fulfil
short durational obligations with short durational assets in hand. Assets recognised as short
term are anything such as inventory and do not consist of property, plant and equipment. For
hospitality industry companies have huge current liabilities in form of salaries, wages and
short- term obligations.

Financial leverage ratio: It provides stakeholders an understanding of long durational

solvency of company in hospitality industry. These ratios state ability of company to fulfil its
long durational liabilities. Companies working in hospitality industry have giant long term
debts along with current liabilities. This debt is utilised to fund large properties such as hotels
or large bus fleet for transportation firms. A large long term assets required to effectively run
a hospitality entity and hence long term debt financing is also basically required.

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Conclusion

Hence it can be stated that above mentioned concepts are useful in acknowledgement of
appropriate and related accounts is essential for making effective decisions within hotel
framework. Also above mentioned concepts are applied to hotel with fifty guest rooms. Each
concept is applied in a hypothetical manner to hotel context and shows applicability in
management accounting reference. Analysis is made so as to understand framework of
management accounting inclusive of estimation and tracking costs. It involves analysing
costs, cost behaviour and cost variances.

16
References

Corporate valuations in hospitality business, (2020). Welcome to Corporate valuation

concepts, (Online), (2020). Available at:
http://www.celeritymoment.com/sitebuildercontent/sitebuilderfiles/lectures_6-11.pdf.
[Accessed at: 14/11/2020]

Mashayekhi, B., & Ara, M. (2017). Activity-Based Costing in the Hospitality Industry: A
Case Study in a Hotel. World Academy of Science, Engineering and Technology
International Journal of Social and Tourism Sciences, 11(9), 2180-2184. Available at:
https://www.researchgate.net/profile/Bita_Mashayekhi/publication/331275094_Activity-
Based_Costing_in_the_Hospitality_Industry_A_Case_Study_in_a_Hotel/links/5c6f8fffa6fdc
c471591ab3c/Activity-Based-Costing-in-the-Hospitality-Industry-A-Case-Study-in-a-
Hotel.pdf

Kihn, L. A., & Ihantola, E. M. (2015). Approaches to validation and evaluation in qualitative
studies of management accounting. Qualitative Research in Accounting & Management.

Novianty, I. (2015). Strategic Management Accounting: Challenges in Accounting

Practices. Research Journal of Finance and Accounting, 6(9), 7.

Goh, E., & Scerri, M. (2016). “I study accounting because I have to”: An exploratory study of
hospitality students’ attitudes toward accounting education. Journal of Hospitality & Tourism
Education, 28(2), 85-94.

Adhikari, A. (2016). Fairness in Participative Pricing: A New Way of Pricing in Hospitality

Sector.

Mattila, A. S., & Gao, Y. (2016). An examination of popular pricing and price framing
techniques in the hospitality industry and directions for future research. International Journal
of Revenue Management, 9(2-3), 175-185.

Storey, J. M. (2018). Assessing hospitality industry employee perceptions of performance

appraisals.

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Karanikola, I. (2015). Human capital investment for front-line non managerial employees in
the hospitality sector in Dubai (UAE) (Doctoral dissertation, Manchester Metropolitan
University).

Arif, T. M. H., Noor-E-Jannat, K., & Anwar, S. R. (2016). Financial Statement and
Competitiveness Analysis: A Study on Tourism & Hospitality Industry in
Bangladesh. International Journal of Financial Research, 7(4), 180-189.

Li, X., Ma, E., & Qu, H. (2017). Knowledge mapping of hospitality research− A visual
analysis using CiteSpace. International Journal of Hospitality Management, 60, 77-93.

Panday, P. K., & Chowdhury, S. (2020). Responsiveness of local government officials:

insights and lessons from participatory planning and budgeting. Asia Pacific Journal of
Public Administration, 1-20.

Shkurkin, D. V., Sogacheva, O. V., Logvencheva, E. S., & Khramova, M. N. (2016).

Modernization of the sphere of tourist and hospitality industry of the south of Russia as a
growth factor of socio-economic stability of the region. International Journal of Economics
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